Business Ethics
Conflict of Interest
By
Oct 3, 2003, 18:23

TI Source Book 2000 Chapter 21: Conflict of Interest, Nepotism and Cronyism The emergence of a new class of African businessmen who reject or are not keen to partake in the old system of cronyism, nepotism and self-dealing, and who demand openness, fair competition and clean business presents unprecedented opportunities. A key element of this new business constituency sees low corruption as essential to sustained economic growth. -- E. Gyimah-Boadi [1]

Given the interplay between the three concepts--conflict of interest, nepotismand cronyism are often rolled together in a single pithy phrase. This isparticularly so when the crash of the "Asian Tigers" is being analysed.

Sidebar:How Indonesia's government lost its "legitimacy"

What is a conflict of interest?

A conflict of interest arises when a person, as a public sector employee orofficial, is influenced by personal considerations when doing his or her job.Thus, decisions are made for the wrong reasons. Perceived conflicts of interests,even when the right decisions are being made, can be as damaging tothe reputation of an organisation and erode public trust, as an actual conflictof interest. In some countries, the law makes it compulsory for public agenciesto have Codes of Ethics which cover these matters. Most countries considerthe matter so important, and so fundamental to good administration, thatthey have a specific conflict of interest law. This can provide that e.g. "a Stateofficer or employee shall not act in his official capacity in any matter whereinhe has a direct or indirect personal financial interest that might be expected toimpair his objectivity or independence of judgment."^[2]

Sidebar:Turmoil in Asia

When does a conflict of interest occur?

Everyone has personal interests and people to whom they are close. It isinevitable that, from time to time, these interests will come into conflict withtheir work decisions or actions. The following checklist can help individualpublic servants identify situations where a conflict of interest is likely to arise:

• What would I think if the positions were reversed: If I was one of those applying for a job or a promotion and one of the decision- makers was in the position I am in? Would I think the process was fair?
• Do I, a relative, a friend or an associate stand to gain or lose financially from the organisation's decision or action in this matter?
• Do I, a relative, a friend or an associate stand to gain or lose my/our reputation because of the organisation's decision or action?
• Have I contributed in a private capacity in any way to the matter being decided or acted upon?
• Have I received any benefit or hospitality from someone who stands to gain or lose from the organisation's decision or action?
• Am I a member of any association, club or professional organisation, or do I have particular ties and affiliations with organisations or individuals who stand to gain or lose from the organisation's consideration of the matter?
• Could there be any personal benefits for me in the future that could cast doubt on my objectivity?
• If I do participate in assessment or decision making, would I be worried if my colleagues and the public became aware of my association or connection?
• Would a fair and reasonable person perceive that I was influenced by personal interest in performing my public duty?
• Am I confident of my ability to act impartially and in the public interest?

Sidebar:Thailand's new constitutions outlaws conflicts of interest

What should happen if someone discloses a conflict of interest?

When someone considers they may have a conflict of interest, what shouldhappen then? Clearly, some "conflicts" may be so minor as not to warrantanything more than their being recorded and made known to the others whoare participating. For example, a member might hold a small number of sharesin a company which are so few that their value could not possibly be affectedby the outcome of the particular matter under review. In such a case the othersinvolved in the process may feel comfortable with that person continuing to participate.Where they do not, however, the person should excuse himself or herself from further involvement.The following checklist can be used to assist in assessing a disclosed conflict of interest:

• Is all the relevant information available to ensure proper assessment?
• What is the nature of the relationship or association that could give rise to the conflict?
• Is legal advice needed?
• Is the matter one of great public interest? Is it controversial?
• Could the individual's involvement in this matter cast doubt on his or her integrity?
• Could the individual's involvement cast doubt on the organisation's integrity?
• How would it look to a member of the public or to a potential contractor or supplier to the organisation?
• What is the best option to ensure impartiality and fairness and to protect the public interest?

Although it is important to deal with perceptions of conflicts of interests, neither of thesechecklists should be seen as automatically disqualifying relationships that no fair and reasonableperson would see as giving rise to a conflict of interest.

Other strategies for an organisation

Other strategies that an organisation can adopt to avoid compromising, or appearing to compromise,its integrity include:

• Keeping full and accurate records of its decision making processes;
• Ensuring openness by making accurate information about the organisation's processes, decisions and actions publicly available;
• Where there is a risk of perceptions of conflict of interests, ensuring the technical/expert judgement of participants in the decision-making can be substantiated.

What is Nepotism?^[4]

Nepotism is a particular type of conflict of interest. Although the expressiontends to be used more widely, it strictly applies to a situation in which a personuses his or her public power to obtain a favour--very often a job--fora member of his or her family.

Sidebar:Nepotism at the European Commission

The nepotism prohibition is not a 'no-relatives' standard, but it does prohibita public servant from using or abusing his or her public position to get publicjobs for family members.^[5]The objective is not to prevent families fromworking together, but to prevent the possibility that a public servant mayshow favouritism towards family members, in the exercise of discretionaryauthority on behalf of the public to hire qualified public employees. As amember of South Africa's Ombudsman's Office has said:

"A typical example might be where it is alleged that someone received an improperadvantage in that he received, through the intervention of a family member whoworks for a certain department, contracts which that department puts out. It might befound that no criminal act is involved but unethical behaviour is. Nepotism is not yetclassified as criminal in our law, yet it is clearly reprehensible and sufficiently unacceptableto require action on the part of the Ombudsman. Furthermore, the act ofnepotism may be a red flag alerting the Ombudsman to the possibility of the official'sperceived need to surround him or herself with those considered to be more thanordinarily capable of being relied upon to act with 'discretion'."^[6]

Nepotism frequently occurs in the private sector, particularly in the context of promoting familymembers in family-owned corporations, where it is seen as legitimate. The impact of anypreference is ultimately on the bottom line (profit) of the corporation, and the bottom line isfamily "property".

In the public sector, however, it means that the most suitable candidate fails to get a post ora promotion, and the public as a whole suffer as a consequence--not to mention the personwho, had there been no nepotism, would have won the position. Or it can mean that a lesscompetitive bid wins a government contract at the cost of the tax payers' money.

Nepotism can cause conflicts in loyalties within an organisation, particularly where one relativeis placed in a direct supervisory position over another. Fellow employees are unlikely tofeel comfortable with such a situation, and it is one which should be avoided. An example ofa legal prohibition reads:

No persons related as father, mother, brother, sister, uncle, aunt, husband, wife, son,daughter, son-in-law, daughter-in-law, niece, or nephew may be placed in a directsupervisory-subordinate relationship.^[7]

Even worse, of course, would be a judge sitting in a case in which he or she had a financialinterest, or where a relation or good friend was involved. In a civil case, the parties may beasked (in a case of doubt) whether they are content with the judge hearing the case, after heor she has explained the potential conflict to them. In a criminal case the judge should simplydeclare his illegibility and not sit.^[8]

More marginal, perhaps, is the question which arises when the sons anddaughters of judges appear in court before their parents. In some court systemsthis has caused no complications, but in others it has aroused fiercecontroversy and given rise to serious allegations of collusion and corruption.

Nepotism primarily involves one or more of the following:

• advocating or participating in, or causing the employment, appointment, reappointment, classification, reclassification, evaluation, promotion, transfer, or discipline of a close family member or domestic partner in a county position, or in an agency over which he or she exercises jurisdiction or control;
• participating in the determination of a close family member's or domestic partner's compensation;
• delegating any tasks relating to employment, appointment, reappointment, classification, reclassification, evaluation, promotion, transfer, or discipline of a close family member or domestic partner to a subordinate; and,
• supervising, directly or indirectly, a close family member or domestic partner, or delegating such supervision to a subordinate. ^[9]

Sidebar:"Patronage is a virtue... Nepotism is wrong..."

What is Cronyism?

Cronyism is a broader term than nepotism, and covers situations where preferences are givento friends and colleagues. In Britain, cronyism is captured in the expressions "old school tie"or "old boys club".

Managing these conflicts

It is essential that organisations have clearly stated and well understood policies and proceduresas well as written codes of conduct to deal with actual, potential and perceived conflictsof interests, including nepotism and cronyism.

Sidebar:"A new political scandal is rocking Ireland"

However, the public interest requires that "only the best shall serve the state". There will beoccasions where a relative is unquestionably the best qualified person for a particular post,and there must be a balancing of interests. For this reason, nepotism rulesshould not be an insuperable barrier and mean that well-qualified candidatesare invariably disqualified. This was written into the following formulationby the City of Bristol (USA)^[11]:

The City of Bristol is interested in hiring able qualified applicants and will consider any person for employment when they meet qualifications. The City's goal is to hire the most qualified applicant who is best suited for the position. Members of your family, members of your immediate household or your relatives will be considered for employment, except when:

• their position or your position would exercise supervisory, appointment, grievance adjustment, dismissal or disciplinary authority or influence,
• if you or the employee would audit, verify, receive or be entrusted with City money or City property,
• circumstances would exist making it foreseeable that the interest of the City and you or the employee would be in conflict or question,
• where the City must limit hiring to avoid a conflict of interest with customers, regulatory agencies, or others with whom the City conducts business, or
• where the City must limit hiring to avoid employment discrimination, personnel policy conflicts or related problems.

The City will not knowingly place you in a situation where you are supervised by a member of your family, your immediate household or your relative, or where favouritism, interpersonal conflict, lack of productivity, lack of efficiency, or other unsound employment conditions including those mentioned in this policy may develop. This policy shall not be retroactive, unless any of the above adverse conditions are being practised. In such a case, the City reserves the right to assign the affected employees to different operating levels, pay scales or locations.

Sidebar:Brazil keeps it in the family

Further, policies and procedures should address the need for and themeans of disclosing and recording conflicts of interests and determiningthe appropriate action for minimising their impact on the integrity of an organisation's operations.

Avoiding nepotism and cronyism in the making of appointments^[12]

The question of avoiding nepotism and cronyism in the awarding of public contracts is dealtwith in the discussion of public procurement. There, such actions have created little short ofmayhem in the management of the affairs of state.

Here, the discussion focuses on appointments to, and within, the public service, although thebasic principles also hold good for much of the private sector.

• Impartiality in all recruitment and selection processes is essential for public sector employees to meet their public duty by acting ethically and in the public interest. Therefore, to avoid perceptions of bias or corruption, a potential applicant should have no direct involvement in any part of the recruitment process for a job for which they may be a candidate. This includes acting as the contact person for potential candidates, framing advertisements or preparing the standard practice for preferred applicants' referees to be contacted. Each referee should be asked the same questions relating to the selection criteria and all the questions and responses should be documented.

It should be clear to all concerned precisely who is accountable for key decisions throughout theprocess, and what the values are that will be applied. This should be formally recorded, and alldecisions and the reasons for those decisions during a selection process should be documented.As in all other aspects of sound administration, good record keeping increases accountability.

In societies where there are particular pressures from clans or a person's extended family, it isadvisable for those involved in the decision-making processes to formally certify that none ofthe applicants is a relative or is known to them, or else to excuse themselves from the processentirely.^[13]

• Competition should be fostered. Advertisements should be framed to both adequately reflect the requirements of the job and to maximise the potential field of applicants. Generally, advertisements should be placed to attract the widest potential field possible. Selection criteria should also be reviewed before recruitment action is taken to ensure they adequately reflect the requirements of the position and attract the widest field of applicants.

Only in exceptional circumstances should truly competitive measures be bypassed. Where thisis done, the decision-maker must be able to demonstrate clear and unambiguous reasons forappointing directly.

• Openness--The risk of corruption is minimised where there are policies and procedures that promote openness in dealing with conflicts of interests.

An administration that adopts a policy of openness for all its recruitment and selection decisionswill avoid sending the wrong message to staff about preferred practices in recruitmentand selection. This will also remove the justification for others to act contrary to statedrecruitment practices and policies without valid reasons. Openness, however, does not meanbreaching confidentiality.

• Integrity--Taking shortcuts can compromise the integrity of the recruitment process. To ensure integrity in recruitment and selection practices, an administration must have clearly stated sanctions for non-compliance with established policies and practices and be seen to use them when necessary.

A number of countries have found that having independent persons involved in the selectionprocess can markedly enhance the integrity of the process. These independent members shouldnot be known to the other committee members. If this is not possible, the extent of the independentmember's affiliation with other committee members should be recorded in writingbefore interviews are held and form part of the recruitment file.

• Appeals--Unsuccessful, but qualified applicants who consider that proper procedures have not been followed, should be able to appeal to an appropriate authority for an independent review of the process and its outcome. ^[14]

Conflict of interest issues when staff leave the public sector^[15]

Managing the separation process when a public servant leaves the public service andenters the private sector has become increasingly important when addressing conflict ofinterest issues.

This is a consequence of several factors. Efficiency reforms have led to "downsizing" and contractingout of certain public sector functions to the private sector. In many administrationsfixed term contract employment for senior public officials has been introduced. At the sametime there has been a convergence of management practices between the public and the privatesectors; the essential qualifications required to work in both are now similar. As a consequencethere has been a growing tendency in many countries for public officials not toregard public sector employment as a long-term career, but to consider moving between thepublic and private sectors in the course of their working lives.

To ensure that public administrators are not tempted by the prospect of jobs after retirement,a sound approach to post public sector employment is required. This both reduces the risk ofcorruption, and renders much less sensitive any confidential information which the retiringpublic servant may have and which competing private sector interests may be keen to obtainfor themselves.

The type of employment which may be cause for concern is one which has a close or sensitivelink with the person's former position as a public official. If a public official misuses hisor her official position to obtain a personal career advantage, whether intentionally or innocently,it adversely affects public confidence in government administration.

There are, perhaps, four main areas in post separation employment that give rise to situationsof conflict of interest and that merit consideration:

• Public officials who modify their conduct to improve their post separation employment prospects. Such conduct can involve favouring private interests over public duty; individual public officials "going soft" on their official responsibilities to further personal career interests; an individual acting partially by over-identifying with prospective employers' interests; or outright bribery, where a public official solicits post separation employment in return for a corrupt performance of duties.
• Former public officials who improperly use confidential government information acquired during the course of official functions for personal benefit, or to benefit another person or organisation. It does not involve the information that becomes part of an individual's personal skills and knowledge that can be legitimately used to gain other employment.
• Former public officials who seek to influence public officials. This involves former public officials pressuring ex-colleagues or subordinates to act partially by seeking to influence their work or securing favours. This can happen in many ways, such as through informal contact, 'jumping the counter' to obtain government information, or lobbying.
• Re-employment or re-engagement of retired or redundant public officials. This may involve:
  1. senior public servants receiving generous redundancy compensation payouts and re-entering the public service in non-executive positions while keeping their full redundancy payments;
  2. public officials leaving public employment only to be re-engaged as consultants or contractors at higher rates of pay to perform essentially the same work; and
  3. public officials who decide to go into business and to bid for work from their former employer after arranging their own redundancies.

The use of codes of conduct is not generally an effective solution in this particular problemarea. The codes cease to have effect when people leave office--the very moment when theseprovisions become relevant. This leaves three generally accepted approaches available:

• Each government agency can develop specific post separation policies, relevant to the degree of risk in this area and the likely impact of those policies on future careers, e.g. of highly qualified professionals with limited fields in which to work.
• Employment contracts can have specific restrictions written into them. (However, some countries limit the legal right to restrict future employment, and this can give rise to difficulties.)
• Enacting legislation is a route that some countries have taken ^[16], but any legislation should be careful to minimise restrictions and not to impose them on people unnecessarily.

There is, of course, a need to ensure that restrictions on post separation employment are inproportion to the risks posed. For this reason, it was the view of public sector managers in theAustralian state of New South Wales that the best approach is not one of blanket prohibitions,but one of dealing with these matters on a case by case basis. They did not consider that thelevel of risk to public sector integrity warranted the degree of hardship and inefficiency thatbroadly targeted public sector restrictions may impose. Views, of course, may differ elsewhere,but these are considerations to keep in mind.

Some legal approaches

Given the complexities of the situations which can arise, the enactment of all-embracing lawsin the area of conflict of interest can be something of a blunt instrument. Thus many countrieshave chosen to approach the more detailed aspects of the problem in a diffused, management-led fashion. In this approach, laws are enacted which deal with the upper levels ofgovernment (for example, as in the 1997 Constitution of Thailand quoted above) and withbasic principles, while the design of appropriate policies is effectively delegated to agenciesand departments, each of which is expected to develop policies appropriate to their own situationsand needs. Even in the implementation of these policies a large measure of common-sense is called for, and the services of an Ethics Office can be particularly valuable.^[17]Equally clearly, conflict of interest, cronyism and nepotism should becovered in appropriate codes of conduct.

By no means all countries have anti-nepotism laws. Where these are lacking, favouritismshown to a relative on the basis of relationship and other family member issues, tend to bedealt with by legal prohibitions such as those against unwarranted privilege, direct or indirectpersonal financial interest that might reasonably be expected to impair objectivity and independenceof judgement, or the appearance of impropriety.

A typical example of a jurisdiction which does have a law reads:

IC 4-15-7-1, on Nepotism, "No person being related to any member of any state boardor commission, or to the head of any state office or department or institution, asfather, mother, brother, sister, uncle, aunt, a husband or wife, son or daughter, son-in-law or daughter-in-law, niece or nephew, shall be eligible to any position in anysuch state board, commission, office or department or institution, as the case may be,nor shall any such relative be entitled to received any compensation for his or herservices out of any appropriation provided by law. However, this section shall notapply if such person has been employed in the same position in such office or departmentor institution for at least twelve (12) consecutive months immediately precedingthe appointment of his relative as a board member or head of such office, departmentor institution. No persons related as father, mother, brother, sister, uncle, aunt,husband, wife, son, daughter, son-in-law, daughter-in-law, niece, or nephew may beplaced in a direct supervisory-subordinate relationship."^[18]

An example of such a law being explained in a policy manual is the following:

An example of a corporation's policy on nepotism reads:

Statements of Policy

1. This section sets forth the policy regarding Employment of Relatives (Nepotism) for all permanent and temporary employees at [the corporation].
2. We are committed to hiring and retaining highly qualified persons. At the same time, we recognise that, despite their qualifications, hiring and retaining close relatives of present employees might raise serious questions regarding the objectivity--or appearance of objectivity--of work assignments, performance appraisals and employee treatment. Our employment policies, administered on a case-by-case basis, are based on balancing these concerns.

Employment Rules

1. No [corporation] employee may cause the employment, appointment, promotion, reassignment, transfer, or advancement of a family member to a position in which the employee supervises or manages. Family member means an individual who is the spouse, parent, brother, sister, child, mother-in-law, father-in-law, son-in-law, daughter- in-law, grandparent, or grandchild.
2. If an employee and family member work in the same office and one of them becomes a manager with supervisory influence over the other, as described above, a transfer will most likely be arranged. Also, if an employment arrangement may be perceived to violate our guidelines prohibiting family members from having supervisory influence over one another, a transfer may also be arranged. If a transfer is not feasible, the employees will have 30 days to decide which family member will stay employed. If the employees do not make the decision within the allotted period, [the corporation] will make the decision based upon the employment history and job performance of both employees, as well as [the corporation's] needs.
3. If two current employees marry, or live together in a spousal relationship though unmarried, they may continue in employment, but are subject to the conditions described in this policy.
4. Any waiver requests to this policy must be submitted, in writing, through the supervising vice president to the Director of Human Resources for approval. ^[20]

Some indicators as to the effectiveness of conflict of interest, nepotism and cronyism rules

• Is there a national law setting out clearly principles which should govern a sound conflict of interest policy?
• Are public appointments made on merit?
• Do government agencies have clear policies in these areas? Are they widely understood by staff and by the public at large?
• Do officials have access to persons who can advise them on ethical issues such as those which arise in this area?
• Are there conflicts between modern governance in these areas and well-established cultural traditions? Is a mechanism provided for the resolution of these conflicts in ways which serve the public interest as a whole?
• Are there clear rules on post-separation employment which act as a check on corrupt practices?